Capital Markets Union: What is Missing to Solve the Puzzle?

In September 2015 the European Commission launched the Capital Markets Union (CMU) Action Plan with the aim of creating alternative sources of financing, that is, sources other than banking. Almost three years later this project is still incomplete, and some pieces of the puzzle are definitely missing.

More than a year ago, the Commission published a mid-term review of the CMU Action Plan setting out a variety of priorities and further actions. After the Brexit referendum, the Commission seems to have shifted to a more centralistic approach. The proposal on the review of the European Supervisory Authorities includes direct supervisory powers and tasks for the authorities, and the proposed Pan-European Personal Pension Product (PEPP), which would be a voluntary personal pension scheme giving consumers a new option to save for their retirement, grants the European Insurance and Occupational Pensions Authority (EIOPA) the power of authorising personal pension providers to market a PEPP.

During the high-level conference, “The Future of Capital Markets in the EU: towards deeper integration?,” organised by CFA Institute at the European Parliament in Brussels on 6 June 2018, national regulators and members of the highlighted why completing a CMU is essential and what is still to be done to reach this objective.

Daniel Dăianu, Member of the Board of the National Bank of Romania, was sceptical about the CMU project and explained that changing the current regulatory and supervisory framework in the EU will not be enough to address the issue of fragmentation of European capital markets. ; both projects should go hand in hand. Just completing resolve the differences in EU financial markets and the problems of the Eurozone. Private risk sharing can complement but not be a substitute for public risk sharing.

Video: Capital Markets Union and European Supervisory Authorities’ reform: views from national supervisors and stakeholders.

Carmine Di Noia, Commissioner at CONSOB (the Italian financial markets authority), expected a more ambitious approach from the Commission as to the legislative proposal on the review of the European Supervisory Authorities (ESAs). More direct supervisory powers should be granted to the European Securities Markets Authority (ESMA), and a different governance structure for the authorities is needed. The new proposed independent reviews on competent authorities, which would be under the responsibility of a new Executive Board of the ESAs, are a step in the right direction. New executive boards would replace the existing management boards and would be composed of independent members, ensuring more effective and impartial coordination of the supervisory practices.

Peter De Proft, Director General at EFAMA, signalled that the packaged retail and insurance-based investment products (PRIIPs) regulation, which entered into force on 1 January 2018, could lead to misleading information given to retail investors, particularly in the context of how costs and performance are disclosed. Such rules need to be reviewed to avoid creating confusion and causing losses for the end investors. De Proft remarked that 2017 was a record year for the fund industry in the EU (especially for cross-border funds such as Undertakings for Collective Investment in Transferable Securities (UCITS) and Alternative Investment Funds (AIFs) ). These data demonstrate that the delegation system in the asset management sector works properly, and changes to it should be well assessed. It is also essential to find a cooperation agreement between the EU and the United Kingdom before Brexit so as not to disrupt the correct functioning of the system.

Guillaume Prache, Managing Director at Better Finance, stressed that the issue of investor protection should be better addressed. The ESAs should have more powers in this field. The recent cases of mis-selling of financial products that occurred in many EU countries have greatly weakened consumer trust in financial markets. This issue should be addressed in the ESAs review legislation. The introduction of independent members in the management board of the authorities or the proposed replacement of the current management board with an executive board, exclusively made up by people who are not from National Competent Authorities, would improve and speed up the decision-making process of the ESAs.

It is now time to address the scarce harmonisation and consistency in supervision and enforcement from member states. If we want to have integrated capital markets in the EU, the ESAs and, in particular, ESMA, should be granted more supervisory powers to better apply a single rulebook for capital markets. Many differences in the implementation of EU directives and their enforcement still exist among EU member states. Legally binding recommendations at the EU level could address this problem.

The fragmentation of capital markets is especially dramatic in the Central and Eastern Europe (CEE) region. The reason is the enormous quantity of obstacles investors face and the different regulatory standards and barriers among the CEE countries. CFA Institute carried out a member survey in early 2018 to better understand which regulatory and supervisory issues are affecting the development of CEE markets. The findings, released in May 2018, show that the low level of growth in these capital markets is due to a scarcity of listed equity and debt securities and weak retail investor demand (numerous mis-selling cases in the region have negatively affected the level of trust in these capital markets as well). Our members are calling for more centralisation of supervisory practices of EU financial markets. A specific post with major details on the results of this survey will be out in the coming weeks.

Roberto Silvestri is EU Policy Specialist, Capital Markets Policy EMEA at CFA Institute. He helps reach out to regulators and stakeholders about the positions that CFA Institute holds and unravel the complexities of EU regulation for CFA Institute members.

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